Very complicated potential real estate transaction
December 16, 2006 3:04 AM   Subscribe

Real-estate lawfilter: Is it possible to lend money towards the cash purchase of a property by a family member, and then be handed ownership by a quit claim deed, and then take out my own mortgage on that property?

I know I need to talk to a real estate lawyer, but this can't wait until monday. I would like to buy a condo for my parents and then have them as my tenants. For tax reasons. But they have signed the contract in their name, so they need to purchase the property. I am going to lend them a certain amount of money so they can close. Then they will file a quit claim deed handing the property over to me. Then I will take out a mortgage.... all at the suggestion of their realtor. Is this possible? Particularly the last step of taking out a mortgage on a property that has already been paid in full. Has anyone heard of this?
posted by mert to Law & Government (16 answers total)
Where are you?

A mortgage is just a loan against the security of the property. There's no reason why you can't take out a mortgage against a property that you already own.

posted by robcorr at 3:18 AM on December 16, 2006

Thanks for the response. The property is in Ft. lauderdale in case that makes a difference.
posted by mert at 4:20 AM on December 16, 2006

I'm not a lawyer in whichever jurisdiction Ft. lauderdale is in. But can I just warn you that even if you can do what you want to, it will not necessarily achieve the goal of reducing your tax? 'Lend them a certain amount of money', 'quit claim deed', 'take out a mortgage'... all of these things suggest a complex transaction full of ways in which, without very good advice, you could easily screw up and land yourself or your parents with a giant tax liability.

Also, it sounds like your parents' realtor is working for them, not for you, and owes you no professional responsibility. Please keep that in mind when you accept any advice from him or her.

Good luck!
posted by A Thousand Baited Hooks at 4:32 AM on December 16, 2006

Why can't this wait until Monday? Unless "time is of the essence" you can almost always delay closing for a short while. The flip is going to require lawyers anyway as their bank will have a lien on the property. You won't be able to get a mortgage until their mortgage is paid off. This would typically all occur simultaneously at a second closing, or perhaps even at the first closing, in which case you could omit them getting a loan. Just because they signed the contract does not mean the seller couldn't agree to sell it to you with their assent, thus making the entire transaction much less complicated. By the way, their realator works not for you, not for them, but for the seller. You need to consult a lawyer.
posted by caddis at 5:35 AM on December 16, 2006

If you are going to lend them the entire purchase price, then there will be no other encumbrances on the property. They can transfer it to you and then you can get a mortgage on it. My question: why would you? Why would you not take a security interest in the condo? That would be a more simple approach.

I am not sure that I understand what everyone is trying to accomplish at any rate.

Be aware, too, that the transfer to you will mean that they will be disqualified from Medicaid eligibility for a nursing home admission anytime in the next five years. Although if you are talking about the purchase of a Fort Lauderdale condo, you are not likely thinking about Medicaid eligibility. But this is an example of one of the many unknown landmines that (as Hooks suggests) await those who try to do complex stuff before securing legal advice.
posted by megatherium at 6:10 AM on December 16, 2006

One other point. A good rule of thumb: if someone says that a deal has to be done right away and cannot wait for you to consider it and seek advice, don't do it. Walk away.

I avoided purchasing a $40,000 timeshare using that ROT.
posted by megatherium at 6:12 AM on December 16, 2006

I know this isn't an answer to the question you've asked, but . . .

If you are not aware of the very complicated tax rules related to renting your property to family members, you need to consult a lawyer before going forward with this plan.

About 6 years ago, I looked into buying a property (in florida) and renting it to my mother. She was in the middle of a long, messy divorce and the plan was to buy it and then transfer it to her at a later point. Her rent (monthly total of mortgage + taxes + HOA fees, etc.) would have been below market value creating tax liability rather than advantage.
posted by necessitas at 6:28 AM on December 16, 2006

Megatherium and necessitas bring up some important points that should make you seriously reconsider doing this on less than 48 hours' notice with legal advice from some anonymous folks on the internet instead of a real lawyer.

In general, the authors of the Internal Revenue Code have thought more about tax planning strategies than you have, and there's probably a clause somewhere that undoes whatever it is you're trying to do. You, the high-income son, are probably trying to get some more mortgage deductions while the retired, low-income parents rent, right? Looks like they've already nailed that one, as per necessitas's article. The tax code is an arms race; this stuff is not for amateurs.
posted by rkent at 6:57 AM on December 16, 2006

I have written contracts on a property, then sold my contract to someone else - I think your parents could sell the contract to you for $1. If you are paying in cash, the seller shouldn't care.
posted by thilmony at 7:22 AM on December 16, 2006

nth the suggestion of a good tax and/or (preferably someone who does both) real estate attorney.

The good ones know exactly what you can and cannot do to reduce your tax liability and the pitfalls of any strategies.

If the seller won't agree to hold off until you get that advice, you probably don't want it anyway. If you really do, perhaps a small amount of earnest money would get them to change their mind on a small delay while you seek legal advice.
posted by wierdo at 9:26 AM on December 16, 2006

Thank you all for your suggestions. My parents have never been good with money (which is why we're in this perdicament in the first place). They put down a 25K deposit on the property without any contingency, not understanding that this means they need to find a mortgage or lose the deposit. Accd. to the real estate agent, they were able to negotiate a below market purchase price by making that kind of offer.. We have about three weeks before the closing to find a mortgage, so I'm feeling a little panicky. More than a little.

With regard to my parents' motives, I have no worry whatsoever that they would take advantage of me. I guess you can't pick your family, so in that regard I'm lucky. (If only they were better with money).

So I gather that I should lend them the entire purchase price to facilitate the transfer. Otherwise, let's see what happens on Monday. I guess I should try to find a real estate lawyer in florida who knows the local ins and outs.
posted by mert at 11:06 AM on December 16, 2006

One of the other things I asked the agent was to approach the seller and ask for an extension. We'll see what comes of that.
posted by mert at 11:07 AM on December 16, 2006

Mert - in case you don't regularly check the email listed on your profile page, I just sent you the name of a real estate lawyer in South Florida.
posted by necessitas at 11:45 AM on December 16, 2006

One would have to be insane to buy a condo in Florida now. So much inventory, so many speculators with sketchy if not outright fraudulent loans, so few buyers.

Enjoy the ride.
posted by Heywood Mogroot at 4:57 PM on December 16, 2006

OK, reading your 11:06 I see it's a little more complicated. My advice is to walk away from the $25K. Even if you could swing the deed transfer, your tax savings are only coming from property taxes and mortgage interest being paid out.

Paying money to get tax advantages, in a declinging market with zero upside this decade, is not wise.
posted by Heywood Mogroot at 5:00 PM on December 16, 2006

We have about three weeks before the closing to find a mortgage

Does the contract say "time is of the essence?" If not, the three weeks is flexible. Regardless, that is plenty of time to consult with a lawyer. Real estate transaction lawyering is cheap, and valuable, never buy property without it.
posted by caddis at 9:06 PM on December 17, 2006

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